On 19 March, the UK Chancellor, George Osborne, confirmed the widely anticipated cap on the carbon price floor as a measure to cut energy costs for business consumers.

The carbon price floor was announced in the 2011 Budget and introduced on 1 April 2013. It is a tax on electricity generators passed on to business consumers via their electricity bills and was intended by the Government to incentivise investment in low-carbon generation. It is currently £4.94 per tonne of carbon dioxide rising to £9.55 per tonne from 1 April 2014. The carbon price floor will rise to 18.08 per tonne of carbon dioxide from 1 April 2015 but will then remain at that level until the end of the decade. Until the Budget 2014 announcement it was due to increase to £30 per tonne of carbon dioxide by 2020.

The Chancellor announced four measures representing a £7 billion package to support reduced energy bills for British manufacturers:

  • A cap of £18.08 per tonne of carbon dioxide on the carbon price floor, taking effect from 1 April 2016 and lasting for the rest of the decade. 
  • The compensation scheme introduced last year for indirect EU ETS and carbon price support scheme for energy intensive industries is extended by four years to 2019-20. This scheme acts to compensate these generators from the requirement to balance their emissions through the purchase of allowances in accordance with EU ETS;
  • A new compensation scheme, worth almost £1 billion, for energy intensive industries will be introduced from 2016-17 to help protect them from the electricity costs associated with the Renewables Obligation and Feed-in Tariff schemes.
  • Exemption from the carbon price floor on fuel used in Combined Heat and Power (CHP) plants for electricity generated to supply manufacturing firms from 1 April 2015.

According to the Government, the compensation package means that energy intensive industries will be “compensated for all government policy designed to support low carbon and renewable investment up until 2019-20”.

While the UK Government has said that these measures will be delivered without any reduction in investment in renewable energy, the carbon price floor and the Emissions Performance Standard were two supporting mechanisms for the UK Government’s Electricity Market Reform being implemented pursuant to the Energy Act 2013. One of the consequences of exemptions and a lower carbon price floor is generally expected to be a reduction in wholesale market reference prices for energy. However, this could put additional pressure on the Levy Control Framework out of which subsidies to low carbon generators are to be funded.

The carbon price floor has been controversial since its introduction in 2011. Commentators anticipated it would drive up wholesale energy costs and while failing to cut emissions, saying that any UK emission reduction would lead to increased emissions elsewhere in the ETS. The Government has resisted calls for it to be scrapped but recognising the added political pressure over the rise in energy bills has offered a compromise position through this Budget.

Separately, the Chancellor has also announced that Government will provide £60 million for new low-carbon innovation to support carbon capture and storage (CCS) technologies that show significant potential to reduce the cost of low-carbon generation in the UK. This is in addition to the £100 million of funding ear-marked for CCS under the DECC Competition programme.

Further information

To read the full text of the 2014 Budget click here